GCC corporates to focus on preservation rather than growth: S&P

Key priorities include cost optimization, managing liquidity, and cash flow preservation

  
Image for illustrative purposes. From 2013 to 2018, the GCC insurance industry grew at a CAGR of 8.9%

Image for illustrative purposes. From 2013 to 2018, the GCC insurance industry grew at a CAGR of 8.9%

Getty Images/ krisanapong detraphiphat

The key focus for GCC corporates will be on preservation rather than growth, a recent report by S&P Global Ratings has showed.

A sharp drop in oil prices and a negative impact from COVID-19 measures have been weighing on corporates in the region and worldwide. According to S&P, new investments are expected to take a back seat for most sectors, with the key priorities for businesses being cost optimization, management of liquidity, and cash-flow preservation.

“Overall, the region has witnessed a decline in new investments and the reduction and postponement of capital expenditures by a number of companies, particularly those in the real-estate sector,” S&P said.

The sectors most exposed to weaker operating conditions are aviation, tourism, real estate, hospitality, nonstaples retail, and oil and gas, according to the ratings agency.

After months of travel bans, flights in the region have now resumed along limited routes. S&P expects, however, that it will take several quarters for international passenger and tourism numbers to normalize.

“In our view, travel and other restrictions due to COVID-19 could result in global air passenger traffic dropping by up to 50 percent in 2020, with the recovery taking several quarters, possibly stretching into 2023,” S&P said.

“Given the elevated health and safety risks associated with traveling, regional tourism will remain under pressure. We also expect sharp declines in intra-region business travel for several quarters,” the report added.

The ratings agency has also seen some companies resort to pay cuts and redundancies, particularly in more exposed sectors such as real estate, aviation and tourism.

At the end of June, an official at the International Monetary Fund was quoted as saying that the economy of the six GCC member countries will shrink by 7.6 percent in 2020 amid low oil prices and the coronavirus outbreak.

With people staying more at home to avoid contracting the virus, minimal activity in large parts of the world and expectations of a global macro-recessionary environment, the oil and gas sector has witnessed a demand shock this year.

SIGNS OF RECOVERY

As restrictions ease, however, S&P expects to see some signs of recovery in consumption towards the end of the year. “In our view, supply will follow agreed cuts under the OPEC+ agreement, while oil and gas players will generally be more cost-cautious regarding spending amid subdued oil prices,” the ratings agency said, adding that GCC national oil companies would likely benefit from their cost advantage compared with global peers in the low oil price environment.

S&P has taken negative rating actions since mid-March 2020 on about 45 percent of its Middle East corporate and infrastructure portfolio, particularly in the real-estate and oil field services sectors.

The report noted that some sectors, like utilities, telecommunications and food retail, are relatively protected from deteriorating conditions.

“We expect 5 percent to 10 percent power and water demand rationalization, since some commercial activities haven’t returned to normal post-lockdown easing, and consumers have lower purchasing power and are more cautious around spending, even on necessities,” S&P said.

Regional banks remain accommodative to good credit, providing funding at better terms than the capital markets, according to the report. S&P expects relatively limited debt capital market activity for most rated GCC corporates in 2020, beyond opportunistic refinancing.

“Although credit is less available than before, GCC banks are still able to support blue-chip names with comfortable pricing terms and maturities and to roll over the debt if necessary,” S&P said.

(Reporting by Gerard Aoun; editing by Daniel Luiz)

gerard.aoun@refinitiv.com

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